Ten Economic Paragraphs Worth Reading: December 27, 2009

If I could add one thing to the Senate bill in conference committee it would be an improvement in the actuarial values for those individuals and families with incomes in the range of 150% to 300% of the poverty line. The Senate bill provides for relatively limited benefits for those low income individuals -- much lower than the House. Given that the Senate bill covers preventive care, and caps out of pocket expenses, this is essentially a "doughnut hole" issue -- the Senate bill provides very little coverage (if any) between the preventive care and the out of pocket maximum. Essentially we are putting fairly low income individuals into high deductible plans. Moving towards the House on these actuarial values (even if we don't get all the way there) would greatly improve the insurance coverage we provide to low income populations.

When you talk to Chinese officials, they seem competent, focused and obsessed with stability (if also, sometimes, arrogant and pedantic). But occasionally you can glimpse the dangers and threats.... Wen Tianping, the spokesman for Chongqing's municipal government, told us. "We work under extreme pressures and we have a lot of difficulties." The foremost difficulty is immigration. In English we'd call it "migration," but our translators unfailingly used the word "immigration," and I began to see that it was the more accurate description of what was happening. Just as developed countries like the United States and members of the European Union face an influx of workers from the developing world, so does China: it's just that China contains both the developed and developing worlds within its borders. The way China regulates this flow is not that different from the way nation states do.... But just as walls and laws have a hard time restricting human traffic from Mexico to the United States when the economic incentives are so extreme, so do the internal regulations of the Chinese state. "They can be migrant workers forever," said Paul Mak, a Chinese-American businessman in Shanghai who has worked for the American company Mary Kay in Shanghai for twelve years. "A migrant worker cannot become a resident of Shanghai. Now if you have a college degree you can come but not without education. You have a class of people in this limbo." This marginal population freaks out the Chinese authorities because they desperately wish to avoid the experience of so many other developing countries, from Brazil to India, which have seen the growth of massive, ungovernable miserable slums in their largest cities...

A few things: 1. In this post, I was not, despite what some readers apparently thought, endorsing the Roman Empire. I was endorsing Monty Python. 2. Some commenters took umbrage at my assertion in this post that Robert E. Lee fought in a terrible cause. The Civil War, they say, wasn’t about slavery. Well, let me pull Abraham Lincoln out from behind this sign to explain it to you. Yes it was. 3. Some commenters ask for proof that I warned early about the housing bubble. As it happens, I ran across this interesting piece from 2005, denouncing the lying liberal media — mainly me — for asserting that there was a bubble in housing.

It seems the entire world is just biding its time, waiting and hoping that asset values return to the lofty heights achieved a few years back and that people resume their mid-decade spendthrift ways. If you wait long enough, it just might work, though that theory will surely be put to a stern test in Dubai. Based on this Reuters story it looks like that's the plan.

ARE canals the most underbuilt piece of infrastructure there is? "The effects of distance on trade and of trade on income have puzzled economists for centuries. This column presents new evidence from a natural experiment – the 1967-1975 closure of the Suez Canal. Results suggest that a 10% decrease in ocean distance results in a 5% increase in trade. Also, it estimates that every dollar of increased trade raises income by about 25 cents." That's from a new Vox piece by James Feyrer. He uses the Suez Canal experiment to demonstrate the link between trade and income, which he then uses to support reductions in trade barriers. I'm all for that, but what about the canals? Presumably, we could use the numbers Mr Feyrer presents above to determine which potential canals are likely to generate the highest income returns, and those expected returns could be compared to the expected cost of construction. Is it really the case that using these measures, all the conceivably positive net return canals have been built already?

As central bank governor of Cyprus, Athanasios Orphanides represents one of the eurozone's smallest economies. But his voice has carried extra weight during the past year because of his expertise on past economic crises. "I was at the Federal Reserve Board in the late 1990s and became interested in following developments in Japan at that time," he says. "It was the first time in the developed world that we had experienced a deflation, and policy rates being very close to zero, since the 1930s." As such, he was one of the forces earlier this year encouraging the European Central Bank to cut its main interest rate faster and further than before and to flood the banking system with liquidity, driving market interest rates even lower.... Mr Orphanides said that while it was too early to judge fully the effectiveness of policy responses to the current crisis: "I think we can already say that we have avoided an experience as terrible, as catastrophic, as in the 1930s."... He admitted being haunted by the words of John Maynard Keynes. "In 1930, even before the Great Depression had taken hold, he was concerned that the mentality and ideas of policymakers could actually hinder the appropriate action needed to avoid the worst. During the 1930s, his concerns proved well founded. But we have learnt the lessons of history." However, the low level of eurozone inflation is a lingering concern for Mr Orphanides. The annual figure turned negative this year, before bouncing back - just - into positive territory in November, when it was 0.5 per cent. Crucially, he argues, expectations by consumers, economists and financial markets about inflation rates in the "medium to long term" remain firmly in line with the ECB's target of an annual rate "below but close" to 2 per cent. Mr Orphanides points out that underlying or "core" inflation measures are still on a downward trend. "Over the past year or so we have observed a decline in core inflation away from our definition of price stability, and that is something which personally I find to be of concern"...

This only confirms what common sense and elementary Keynesian theory would lead one to expect. In a slump there is no natural tendency for the rate of interest to fall, because people’s desire to hoard money is increasing. So printing enough money to “satisfy the hoarder” is the only way of getting interest rates or the exchange-rate down. But, of course, there is always “market sentiment” to fall back on. The government must cut its spending now, because this is what “the markets” expect. These are the same markets that so wounded the banking system that it had to be rescued by the taxpayer. They are now demanding fiscal consolidation as the price of their continued support for governments whose fiscal troubles they have largely caused. Why on earth should we take this market sentiment any more seriously than that which led to the great debauch of 2007? Markets, it is sometimes said, may not know what they are talking about, but governments have no choice but to do what they tell them. This is unacceptable. The duty of governments is to govern in the best interests of the people who elected them not of the City of London. If that means calling the bankers’ bluff, so be it.

When he did it yesterday I thought maybe he was just free-associating or something, but Media Matters observes that yesterday in formal remarks on the Senate floor Lindsay Graham again argued that South Carolina deserves a fair share of Medicaid money specifically by citing the fact that black people live there. Graham seems to have some combination of the belief that all black people are poor, only black people are eligible for Medicaid, all poor people are black, or something. The reality is that South Carolina is, in fact, a state with a lot of poor people—its 15.1 percent poverty rate in 2007 put it above the national average, and the number will have only gone up since the recession hit. But of course poor people can be white, black, Asian, whatever. And Matt Finkelstein observes that there are more white Medicaid recipients in South Carolina than black ones.

Who would have imagined that the 2004 presidential election would represent something of a last chance for the Democrats?... [C]onservatism's progress goes much deeper than the gains that the Republican Party has made... or the steady decline in Democratic registration. The Right clearly has ideological momentum on its side.... [T]he grandson of Prescott Bush has cut taxes, catered to the Religious Right, and generally governed like a Sunbelt business tycoon....Bush has reduced the Democratic Party into merely the anti-Bush party: the party of the moon rather than the sun.... [H]e seems set to conitnue with a onservative agenda, redesigning Social Security, solidifying his tax cuts, pouring more money into America's military might...

UNITED STATES TREASURY, May 18, 1994, MEMORANDUM FOR ASSISTANT SECRETARY FOR ECONOMIC POLICY ALICIA MUNNELL. From Brad DeLong, Deputy Assistant Secretary, Economic Policy. Subject: EQUIPMENT INVESTMENT BOOM. Isn’t this remarkable? I should figure out how much of it simply the falling price of computers coupled with the 1987 base year. But if we do not see a substantial acceleration of U.S. potential output growth over the next few years, Larry Summers and I will have a lot of explaining to do...

Comments

If I could add one thing to the Senate bill in conference committee it would be an improvement in the actuarial values for those individuals and families with incomes in the range of 150% to 300% of the poverty line. The Senate bill provides for relatively limited benefits for those low income individuals -- much lower than the House. Given that the Senate bill covers preventive care, and caps out of pocket expenses, this is essentially a "doughnut hole" issue -- the Senate bill provides very little coverage (if any) between the preventive care and the out of pocket maximum. Essentially we are putting fairly low income individuals into high deductible plans. Moving towards the House on these actuarial values (even if we don't get all the way there) would greatly improve the insurance coverage we provide to low income populations.

When you talk to Chinese officials, they seem competent, focused and obsessed with stability (if also, sometimes, arrogant and pedantic). But occasionally you can glimpse the dangers and threats.... Wen Tianping, the spokesman for Chongqing's municipal government, told us. "We work under extreme pressures and we have a lot of difficulties." The foremost difficulty is immigration. In English we'd call it "migration," but our translators unfailingly used the word "immigration," and I began to see that it was the more accurate description of what was happening. Just as developed countries like the United States and members of the European Union face an influx of workers from the developing world, so does China: it's just that China contains both the developed and developing worlds within its borders. The way China regulates this flow is not that different from the way nation states do.... But just as walls and laws have a hard time restricting human traffic from Mexico to the United States when the economic incentives are so extreme, so do the internal regulations of the Chinese state. "They can be migrant workers forever," said Paul Mak, a Chinese-American businessman in Shanghai who has worked for the American company Mary Kay in Shanghai for twelve years. "A migrant worker cannot become a resident of Shanghai. Now if you have a college degree you can come but not without education. You have a class of people in this limbo." This marginal population freaks out the Chinese authorities because they desperately wish to avoid the experience of so many other developing countries, from Brazil to India, which have seen the growth of massive, ungovernable miserable slums in their largest cities...

A few things: 1. In this post, I was not, despite what some readers apparently thought, endorsing the Roman Empire. I was endorsing Monty Python. 2. Some commenters took umbrage at my assertion in this post that Robert E. Lee fought in a terrible cause. The Civil War, they say, wasn’t about slavery. Well, let me pull Abraham Lincoln out from behind this sign to explain it to you. Yes it was. 3. Some commenters ask for proof that I warned early about the housing bubble. As it happens, I ran across this interesting piece from 2005, denouncing the lying liberal media — mainly me — for asserting that there was a bubble in housing.

It seems the entire world is just biding its time, waiting and hoping that asset values return to the lofty heights achieved a few years back and that people resume their mid-decade spendthrift ways. If you wait long enough, it just might work, though that theory will surely be put to a stern test in Dubai. Based on this Reuters story it looks like that's the plan.

ARE canals the most underbuilt piece of infrastructure there is? "The effects of distance on trade and of trade on income have puzzled economists for centuries. This column presents new evidence from a natural experiment – the 1967-1975 closure of the Suez Canal. Results suggest that a 10% decrease in ocean distance results in a 5% increase in trade. Also, it estimates that every dollar of increased trade raises income by about 25 cents." That's from a new Vox piece by James Feyrer. He uses the Suez Canal experiment to demonstrate the link between trade and income, which he then uses to support reductions in trade barriers. I'm all for that, but what about the canals? Presumably, we could use the numbers Mr Feyrer presents above to determine which potential canals are likely to generate the highest income returns, and those expected returns could be compared to the expected cost of construction. Is it really the case that using these measures, all the conceivably positive net return canals have been built already?

As central bank governor of Cyprus, Athanasios Orphanides represents one of the eurozone's smallest economies. But his voice has carried extra weight during the past year because of his expertise on past economic crises. "I was at the Federal Reserve Board in the late 1990s and became interested in following developments in Japan at that time," he says. "It was the first time in the developed world that we had experienced a deflation, and policy rates being very close to zero, since the 1930s." As such, he was one of the forces earlier this year encouraging the European Central Bank to cut its main interest rate faster and further than before and to flood the banking system with liquidity, driving market interest rates even lower.... Mr Orphanides said that while it was too early to judge fully the effectiveness of policy responses to the current crisis: "I think we can already say that we have avoided an experience as terrible, as catastrophic, as in the 1930s."... He admitted being haunted by the words of John Maynard Keynes. "In 1930, even before the Great Depression had taken hold, he was concerned that the mentality and ideas of policymakers could actually hinder the appropriate action needed to avoid the worst. During the 1930s, his concerns proved well founded. But we have learnt the lessons of history." However, the low level of eurozone inflation is a lingering concern for Mr Orphanides. The annual figure turned negative this year, before bouncing back - just - into positive territory in November, when it was 0.5 per cent. Crucially, he argues, expectations by consumers, economists and financial markets about inflation rates in the "medium to long term" remain firmly in line with the ECB's target of an annual rate "below but close" to 2 per cent. Mr Orphanides points out that underlying or "core" inflation measures are still on a downward trend. "Over the past year or so we have observed a decline in core inflation away from our definition of price stability, and that is something which personally I find to be of concern"...

This only confirms what common sense and elementary Keynesian theory would lead one to expect. In a slump there is no natural tendency for the rate of interest to fall, because people’s desire to hoard money is increasing. So printing enough money to “satisfy the hoarder” is the only way of getting interest rates or the exchange-rate down. But, of course, there is always “market sentiment” to fall back on. The government must cut its spending now, because this is what “the markets” expect. These are the same markets that so wounded the banking system that it had to be rescued by the taxpayer. They are now demanding fiscal consolidation as the price of their continued support for governments whose fiscal troubles they have largely caused. Why on earth should we take this market sentiment any more seriously than that which led to the great debauch of 2007? Markets, it is sometimes said, may not know what they are talking about, but governments have no choice but to do what they tell them. This is unacceptable. The duty of governments is to govern in the best interests of the people who elected them not of the City of London. If that means calling the bankers’ bluff, so be it.

When he did it yesterday I thought maybe he was just free-associating or something, but Media Matters observes that yesterday in formal remarks on the Senate floor Lindsay Graham again argued that South Carolina deserves a fair share of Medicaid money specifically by citing the fact that black people live there. Graham seems to have some combination of the belief that all black people are poor, only black people are eligible for Medicaid, all poor people are black, or something. The reality is that South Carolina is, in fact, a state with a lot of poor people—its 15.1 percent poverty rate in 2007 put it above the national average, and the number will have only gone up since the recession hit. But of course poor people can be white, black, Asian, whatever. And Matt Finkelstein observes that there are more white Medicaid recipients in South Carolina than black ones.

Who would have imagined that the 2004 presidential election would represent something of a last chance for the Democrats?... [C]onservatism's progress goes much deeper than the gains that the Republican Party has made... or the steady decline in Democratic registration. The Right clearly has ideological momentum on its side.... [T]he grandson of Prescott Bush has cut taxes, catered to the Religious Right, and generally governed like a Sunbelt business tycoon....Bush has reduced the Democratic Party into merely the anti-Bush party: the party of the moon rather than the sun.... [H]e seems set to conitnue with a onservative agenda, redesigning Social Security, solidifying his tax cuts, pouring more money into America's military might...

UNITED STATES TREASURY, May 18, 1994, MEMORANDUM FOR ASSISTANT SECRETARY FOR ECONOMIC POLICY ALICIA MUNNELL. From Brad DeLong, Deputy Assistant Secretary, Economic Policy. Subject: EQUIPMENT INVESTMENT BOOM. Isn’t this remarkable? I should figure out how much of it simply the falling price of computers coupled with the 1987 base year. But if we do not see a substantial acceleration of U.S. potential output growth over the next few years, Larry Summers and I will have a lot of explaining to do...